Chinese Central Government Further Promotes Foreign Investments

On 13 August 2023, the State Council of the People’s Republic of China (“PRC”) released its Opinions on Further Optimizing Foreign Investment Environment and Reinforcing the Efforts to Attract Foreign Investment (“Opinions”).

In the wake of a rather weak rebound of the economy, since the beginning of 2023, China has increasingly made efforts to carry out series of activities for the "Year of Investment in China" to attract more foreign capital. The release of the Opinions must be seen against this general background.

The Opinions contain in total 24 items to address respectively 6 topics for attracting foreign investments.

1. Improve the quality of using foreign investment

The Opinions explicitly mention a number of industrial sectors and investment policies where foreign investments shall be further encouraged and supported. They are:

a) Foreign investment in key areas

The following industrial sectors are “key areas” where foreign investments shall be encouraged and supported:

(1) Foreign-invested research and development centers (“R&D FIEs”)

Foreign investors shall be supported in establishing R&D FIEs in China and carrying out technology research and development and industrial application jointly with domestic enterprises. R&D FIEs shall be encouraged to undertake major science and research projects.

Lacking any details, this policy does not seem to bring any new development for treatment of R&D FIEs compared to the existing PRC law on R&D FIEs. For instance, according to the Rules of the Shanghai Municipality on Encouraging the Establishment and Development of Foreign-invested Research and Development Centers promulgated by Shanghai Municipality People’s Government in 2020, R&D FIEs established in Shanghai are entitled to receive facilitation measures for import of R&D equipment and matters, facilitated cross-border financial services, optimized foreign exchange payment formalities, preferential policies for their employees, etc.

Therefore, we expect that the Chinese legislative body will release more detailed and additional implementing rules to substantiate the announced support for R&D FIEs. Also, the term “major science and research projects” will need to be further defined in order for foreign investors to decide whether the R&D projects they plan to invest in are encouraged or not.

(2) Biomedical field

The establishment and implementation of foreign-invested projects in biomedical areas shall be accelerated. FIEs shall be encouraged to carry out clinical trials of overseas-listed cellular and gene therapy medicines in China in accordance with the law, and to optimize the application procedures for registration of listed medicines produced outside the PRC that are transferred to domestic production.  

According to the currently effective Special Administrative Measures (Negative List) for Foreign Investment Market Access, 2021 Version and the Special Administrative Measures (Negative List) for Foreign Investment Market Access to Pilot Free Trade Zones, 2021 Version (“Negative Lists”), as well as the Catalogue of Encouraged Industries for Foreign Investment (2022) (“Encouragement Catalogue”), foreign investment in medicines is generally allowed, however, not encouraged in the PRC. The Encouragement Catalogue only stipulates that foreign investment in the R&D of biomedical technology and production of biological medicines is encouraged in one of the central and western regions in the PRC, i.e. Guangxi Autonomous Region. Therefore, we see a potential trend that the manufacture of, at least, cellular and gene therapy medicines would gradually become an encouraged industrial sector in the PRC. In the future, foreign investors may be further encouraged to produce more and more types of medicines in the PRC.

How this generally positive development in the biomedical field will be reflected on the legislative level still needs to be awaited.  

(3) Vocational education and training in selected industrial areas

FIEs in the areas of advanced manufacturing, modern services, and digital economy shall be supported in carrying out vocational education and training with various types of (Chinese) vocational colleges and universities (including technical colleges and universities) and vocational training institutions.

To be noted is that, according to the Negative Lists, foreign investment in pre-school, general high school and higher education is not allowed in the form of a wholly foreign-owned enterprise (“WFOE”) and must be carried out in joint cooperation with Chinese investors. Further, foreign investment in non-academic training institutions (e.g. sport or language training) is permitted in the form of a WFOE, but subject to a school license issued by the competent education administration or, in case of professional training, an approval by the competent human resource and social security authority with higher statutory requirements on staff, facilities, and systems of the institutions.

The meaning of the Opinions as regards vocational education and training to be carried by FIEs is not fully clear. Considering the existing legal situation, a supporting measure will only make sense if FIEs in the mentioned industrial areas will not need to obtain a school license for providing vocational education and training services, as long as they cooperate with a Chinese education or training institution. In such case, however, in which form such “cooperation” shall be carried out still remains unclear.

The above-mentioned support opens new business opportunities for FIEs in the relevant industrial areas. However, the implementation of such support, as mentioned above, will still require clear legal provisions to be released by the competent authorities.

b) Pilot projects in service sector

Pilot projects in certain areas of the service sector shall be intensified to attract more foreign investors.

(1) Intellectual property related pledge financing and securitization

The Chinese government will encourage the development of combined pledge financing of intellectual property, equity and related physical assets, and support the standardization and exploration of the securitization of intellectual property.

We understand that these intellectual property related polices are a reiteration by the State Council of the relevant parts in the Outline for Building a Power of Intellectual Property in 2023 and the Plan for Implementing and Promoting the 14^th Five-Year Plan (“IP Outline and Plan”, promulgated by the China National Intellectual Property Administration on 21 July 2023. ) According to Item 89 of the IP Outline and Plan, the respectively competent authorities shall be responsible for promoting the improvement of intellectual property pledge financing models, and steadily and prudently expanding support for intellectual property pledge financing, guiding pilot banks to explore internal intellectual property assessment models, and promoting the unified inquiry of intellectual property related security registration information. According to Item 92 of the IP Outline and Plan, it is the responsibility of the China Securities Regulatory Commission (“CSRC”) to steadily promote the securitization of intellectual property assets, encourage technology-based enterprises to carry out financing through the mode of intellectual property asset securitization, improve the supervision system of intellectual property asset securitization business, strengthen the daily supervision of intellectual property information disclosure of listed companies, and urge listed companies to strictly implement relevant provisions on intellectual property information disclosure.

However, neither the IP Outline and Plan nor the Opinions provide for detailed stipulations on how intellectual property related pledge financing and securitization shall be promoted and what the concrete encouraging and supportive measures are for foreign investors. Especially, current PRC law barely regulates the securitization of intellectual property in any detail so that the applicable regulations or rules are yet to be made and promulgated.

(2) More pilot areas for share transfer in equity investment and venture capital investment

The pilot areas for share transfer in equity investment and venture capital investment shall be increased in an orderly manner.

Initially in July 2020, the Executive Meeting of the State Council decided to carry out pilot projects of equity investment and venture capital share transfer in regional equity markets. The purpose of such share transfer pilot projects is to provide short-term liquidity support and standardized exit channels for private equity holders, to provide qualified investors with high-quality investment targets, and to broaden the exit channels for equity investment and venture capital. Following this decision of the State Council, the CSRC approved pilot projects in the regional equity markets of Beijing, Shanghai, Ningbo, etc.

Equity investment and venture capital investment by foreign investors in the PRC is generally permitted under the relevant PRC legal framework which includes mainly the Company Law, the Partnership Enterprise Law, the Foreign Investment Law, the Provisions on Investment Companies Established by Foreign Investors, the Regulations on the Administration of Foreign-invested Venture Capital Companies, the Interim Administrative Measures for Venture Capital Investment Enterprises, etc. Therefore, a more regulated and facilitated exit channel for foreign-invested private equity holders will boost the investors’ confidence and is a generally positive development for the relevant foreign investors.

(3) More pilot areas for value-added telecommunication businesses

The number of pilot areas for opening up value-added telecommunication businesses, such as domestic Internet virtual private network business (with a foreign equity ratio of no more than 50%), information service business (Apps stores only, excluding online publishing services), and Internet access service business (Internet access services for users only), shall be steadily increased.

According to the Negative Lists, the foreign equity ratio in value-added telecommunication businesses shall not exceed 50% (except for e-commerce, domestic multi-party communications, information storing and forwarding and call centers), and the basic telecommunication services must be controlled by a Chinese party. Thus, the conclusion can be drawn that the foreign equity ratio in other information service business (Apps stores only, excluding online publishing services) and Internet access service business (Internet access services for users only) outside the areas of e-commerce, domestic multi-party communications, information storing and forwarding and call centers can also be more than 50% in the respective pilot areas.

According to the relevant notice issued by the PRC Ministry of Industry and Information Technology, pilot projects for value-added telecommunication businesses shall be carried out in all pilot free trade zones (“FTZs”) approved by the State Council. Currently, according to public information, the FTZs in Shanghai and Hainan Province have already rolled out the above-mentioned pilot projects for value-added telecommunication businesses. It is expected that the other FTZs will also implement such pilot projects soon.

c) Broaden the channels for attracting foreign investments

(1) Foreign investment through holding companies and regional headquarters

Qualified foreign investors are encouraged to establish holding companies and regional headquarters ("RHQs”). Enterprises founded by a holding company may enjoy the treatment as an FIE according to relevant provisions.

These provisions are not new. For instance, the Shanghai People’s Government last updated and issued the Provisions on Encouraging Multinational Companies to Establish RHQs in 2022 to further reduce the establishment requirements for RHQs and to define a new type of headquarter enterprise, i.e., “business unit headquarters”, besides “headquarter institutions”. However, subsidies and rewards are only available for RHQs (i.e. they do not apply for headquarter institutions and business unit headquarters) according to the relevant Shanghai local measures which have not been updated since 2018. Also, that enterprises founded by a holding company may enjoy the treatment as an FIE has already been stipulated in Article 20 of the Provisions on the Establishment of Investment Companies by Foreign Investors since 2004. In fact, nowadays, FIEs generally do not enjoy much different preferential treatment compared to domestic-invested companies, unless otherwise granted by the local governments on the basis of investment agreements.

Therefore, foreign investors need to see concrete preferential measures and supporting policies in order to decide to establish a holding company or RHQ.

(2) Foreign investment through qualified foreign limited partnerships (“QFLPs”)

The Opinions also require in-depth implementation of the pilot projects of domestic investment by QFLPs.

QFLP pilots refer to pilot projects for raising funds from overseas natural persons or institutional investors (i.e. QFLPs) in a non-public manner for investing in domestic private equity. Pilot funds will be set up in pilot areas and subscribed by QFLPs. So far, there have been over 70 QFLP pilot areas including Shanghai, Beijing, Tianjin, Chongqing, Guangzhou, etc., and each pilot area has its own administrative measures to regulate details of the establishment and operation of pilot funds. In Beijing, for instance, a pilot funds management enterprise can be set up in the form of a domestic- or foreign-invested company or partnership, and foreign capital raised by the pilot fund may be used for purchasing equity interests of non-listed companies, ordinary shares of listed companies that are not publicly offered and traded, investing in domestic private investment funds, etc.

Whether and how the Opinions will impact the existing QFLP administration in the pilot areas still needs to be seen. It is, however, for sure that foreign investors are encouraged to consider investments through QFLPs and will be granted with supporting measures which will need to be checked on a case-by-case basis with the respective competent authorities (e.g., the CSRC, the local departments of the State Administration of Foreign Exchange, banks, etc.).

d) Support FIEs in gradual industrial transfer

FIEs are encouraged to partner and cooperate with enterprises in the central and western, northeastern and border regions for industrial transfers by sharing production value and benefits. The concept of the “gradual industrial transfer by FIEs” has been introduced by the Chinese government in various occasions in order to guide the investment directions of foreign investors and to indicate the future geographic focus of the Chinese industrial development. For instance, the PRC National Development and Reform Commission issued a notice in October 2022 to, among other topics, promote and invite multinational companies in the manufacturing industry to give priority to invest in the central and western and northeastern regions where there is a better industrial development foundation.

Whether and how such concept will impact existing FIEs and future foreign investment projects is difficult to tell. On the one hand, we do not exclude the possibility that the respective local governments in the central and western or northeastern regions will grant more attractive conditions and financial incentives to foreign-invested projects or FIEs. On the other hand, it will be difficult to predict whether this will be sufficient for foreign investors. They should seek necessary consultation on the existing and future planning of the local governments in relation to industrial access, granting of industrial land use rights, environmental protection, financial and tax incentives, etc. in order to secure a stable and attractive investment environment in a long run. 

e) Improve the mechanism for promoting the construction of foreign-invested projects

Governmental bodies are required to secure the services for foreign-invested projects and to efficiently complete their construction. Thereby, FIEs shall be supported in more frequently participating in “Green Certificate” trading and inter-regional green power trading.

2. Secure the national treatment for FIEs

National treatment of FIEs is a basic legal principle according to the Foreign Investment Law. In correspondence to Article 15 (equal participation of FIEs in making standards) and 16 (equal treatment of FIEs in governmental procurement activities) of the Foreign Investment Law, the Opinions explicitly mention these two principles in their Item 6 and 7. Noteworthy is that, since July 2022 the PRC legislative body has been amending the Governmental Procurement Law. In the amended draft there are two new terminologies: “manufactured within the territory of the PRC” and “first purchase orders (for innovative procurement)”. According to the Opinions, FIEs shall be supported in innovating and developing world-leading products within the PRC. Therefore, to realize such support, the amendment of the Governmental Procurement Law should be accelerated.

The Opinions further stress that FIEs shall not be excluded or discriminated due to their (foreign-invested) brands, and no additional conditions shall be set for the enjoyment of any policies by FIEs and their products and services, except for those expressly provided for in laws or in areas concerning national security.

3. Continuously strengthen the protection for foreign investment

The administrative protection for intellectual property and enforcement against infringement shall be enhanced. In particular, precautionary measures against infringement shall be efficiently provided for exhibits by means of accepting applications for copyrights, patents, trademarks and other intellectual property rights of the exhibits. Also, the protection of intellectual property rights in the field of procurement of medicines and medical consumables shall be strengthened. Enforcement against infringement upon intellectual property rights of FIEs must be cracked down resolutely. Special enforcement actions shall be taken against cross-regional and chain infringement violations.

4. Improve the facilitation level for investment and operation

Attracting foreign investments shall be accompanied with auxiliary measures to facilitate the entry/exit and stay of foreign staff and the security management mechanism for cross-border data flow, to reduce the frequency of inspections of FIEs with lower credit risks, and to improve a sound round-table meeting system for FIEs.

In our view, among other topics, foreign investors and FIEs should, due to the increasing control on data security and privacy protection, especially note the administrative requirements on outbound transfer of data and personal information. According to the Opinions, the competent authorities should support Beijing, Tianjin, Shanghai, the Guangdong-Hong Kong-Macao Greater Bay Area and other places in the process of implementing systems such as data outbound security assessment, personal information protection certification, and filing of standard contracts for personal information outbound. Therefore, foreign investors and FIEs should keep an eye on the development of the respective systems and consult their advisors and the competent authorities in case of compliance related questions. 

5. Increase the support for finance and tax

In order to attract more foreign investments, the Opinions further stipulate that financial and tax support should be granted to foreign investments and FIEs. Such support includes, for instance, special funds allocated by the Central Government, tax benefits for foreign investors’ domestic re-investments, FIEs, foreign staff of FIEs, qualified R&D FIEs, etc.

Among these financial and tax support measures, however, we have not seen anything new compared with the currently applicable incentives available for FIEs. For instance, the Opinions encourage foreign investors to re-invest in China using profits they have obtained from their existing investments in China, and such re-investments shall not be subject to withholding tax. This is an existing tax policy nationwide. Neither is the exempted import duty for imported equipment used for encouraged foreign-invested projects a new policy. Therefore, we regard the relevant provisions in the Opinions as a mere restatement or confirmation of the exiting financial and tax policies.

Nevertheless, foreign investors are advised to clarify and ensure any tax or financial incentives which their projects shall be entitled to by law when making their business plans. In case of any subsidies and rewards granted by local governments, their legality and the competence of the granting bodies should be verified against applicable laws and regulations.

The current tax regulations which grant foreign employees of FIEs individual income tax (“IIT”) exemption of their housing allowance, language training allowance and children’s education allowance will expire on 31 December 2023. So far there are no new regulations to prolong the term of such IIT exemptions. However, such exemptions may have become more likely.

6. Perfect the promotion of foreign investment

The local investment promotion departments shall attract foreign investments by means of, for instance, establishing investment promotion mechanisms and platforms with relevant foreign countries and regions, improving the recruitment and salary conditions for non-civil servant staff of the investment promotion departments, supporting the local investment promotion delegations in participating overseas conferences and exhibitions for business promotion, enhancing the business advertising through the Chinese embassies and consulates, etc.

Overall speaking, the Opinions show a determination of the PRC Central Government to further attract and support foreign investments. This is generally a positive signal to stabilize the confidence of foreign investors investing or planning to invest in China. However, most of the items in the Opinions are either high-level policies subject to implementing rules yet to come, or they have already been implemented for foreign investments in China for some time. Thus, to provide details, implementing rules will need to be issued, hopefully soon. We will monitor the development of the relevant supporting measures announced under the Opinions. Meanwhile, foreign investors are recommended to stay in close contact with the Chinese legislative development and consult their advisors or the in-charge governmental bodies in case of any doubts or concerns.